Given the tax effects of converting the property to rental use, would the cash flow from renting the property be enough to meet the $12,000 annual mortgage payment? Explain.
Mary and Charles have owned a beach cottage on the New Jersey shore for several years and
have always used it as a family retreat. When they acquired the property, they had no intentions
of renting it. Because family circumstances have changed, they are considering using the cottage
for only two weeks a year and renting it for the remainder of the year. Their AGI approximates
$80,000 per year, and they are in the 32% tax bracket (combined Federal and state). Interest and
real estate taxes total $8,000 per year and are expected to continue at this level in the foreseeable
future. If Mary and Charles rent the property, their incremental revenue and expenses are
projected to be:
Rent income $ 22,000
Rental commissions (4,000)
Maintenance expenses (9,000)
If the cottage is converted to rental property, they plan to be actively involved in key rental and
maintenance decisions. Given the tax effects of converting the property to rental use, would the
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